Can the average small business benefit from R&D tax credits?
The answer? In more ways than you might realise.
The Research & Development (or R&D) Tax Credit is an initiative to get the UK’s limited companies to be innovative and reap interim rewards for developing process and products within their trades. Surprisingly however, it is a highly under utilised scheme.
Why do we think that is? Well, for two main reasons. Firstly, as a scheme it’s relatively unknown. It hasn’t been widely published and many accountants simply don’t know that it exists. Secondly, for those that do know of its existence, it is a commonly held myth that it is a scheme for science or technology focused businesses only. Industries that aren’t obvious qualifiers, such as food development, construction or even financial planning have benefited.
Whilst these two areas certainly do qualify, the reach is far wider and we have helped several of our small businesses, and their owners, apply for and successfully receive tax credits or cash refunds totalling over half a million pounds.
So what’s it all about?
In a nutshell, if you are involved in a project or activity where you seek to advance a process or develop a product in a scientific or technological you may well qualify. The project must relate to a trade you are currently engaged in, or intend to engage.
Most importantly, these advances and developments do not need to be “new to the world”. They just need to be new to your company. To avoid totally re-inventing the wheel however, these advances should not be google-able. They should seek to overcome or try to overcome an uncertainty in your business and can not be easily worked out by a professional in the field.
What costs qualify?
Costs that qualify include, but are not limited to, staff salaries and associated salary costs, use of subcontractors, materials and consumables, including heat and light etc, as well as costs of testing etc.
How does the tax work?
A small company can deduct up to 130% of qualifying costs from yearly profit, as well as the normal 100% deduction that all costs benefit from. If this still leaves the company in tax paying position, then a credit against the tax is received. If it leaves the company in a tax-loss position, the company will receive cash back from HMRC. In some cases it may be a mixture of the two. The return can be up to 33p for every pound that you spend. There are a range of qualifying conditions for the SME scheme, based on the size of the business.
Rules are also changing for small businesses and will be restricted to three times the PAYE and NIC’s liability from April 2020 however.
Is it easy to do or should I engage an expert?
HMRC expect a solid report, backed up with sound cost analysis of the project undertaken. The more self explanatory and convincing it is, the less chance of an enquiry before the tax credit or refund is applied. Some small business owners do this themselves, with their accountants. Depending on the sums involved, specialist R&D companies could undertake all the work on your behalf for a cut of the return. Whilst they do not always undertake work below a certain level of spend, they are experts at identifying all qualifying projects, often when business owners don’t recognise them themselves, which often results in a greater return. Any good specialist will only present a case to HMRC that they are prepared to defend themselves at no additional cost to you.
Other things I should know
If you are a director who spends time working on a project, but only gets paid a small monthly amount through PAYE and the remainder by dividend, then your ability to reclaim will be restricted. It is often worth taking time to plan the best way to structure your activities and balance the claim potential against other business factors.
Claims can be revisited up to two accounting years previously, so don’t know worry if you haven’t made one in the past and think that you could have. It’s sensible to get in quick before any other opportunities are confined to the depths of time.
Once a claim is submitted, HMRC take between 4 – 8 weeks to make a cash payment if due, so it’s worthwhile getting your accounts done as close to the year end as possible for that cash flow boost.
The next best step is to talk to a qualified accountant (affiliated with ICAEW or ACCA) who has experience of making these claims, to determine whether this is something that you can do together or whether there is merit in taking the case to a specialist. We have experience of handling these claims since the scheme began and it is one of our biggest joys when our clients realise an accelerated return for the work they have undertaken. Contact Deborah Edwards today to see how we can help or call 01726 74573!